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Okomboli Ong’ong’a oversees investment and construction activities across six East African countries for the Pan African Housing Fund, which focuses on expanding affordable and middle-income residential housing for families. He was instrumental in expanding the fund to include young adults, who make up more than 60% of the population and are in dire need of housing options, including those attending universities. He was recently recognized as an Eisenhower Fellow for his work.

Ong’ong’a is using his fellowship to lay the groundwork for a fund that will create affordable rental and rent-to-own opportunities for young adults who can’t afford typical bank loans, but who can afford to pay rent. Ong’ong’a discussed his approach to housing on theKnowledge@Wharton show, which airs on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

An edited transcript of the interview appears below.

Knowledge@Wharton: How would you characterize the housing sector in Africa right now?

Okomboli Ong’ong’a: We break it into two — that which is in the urban areas and that which is in the rural areas. When our governments discuss the question of housing, and the supply and the quality of housing, they don’t disaggregate the two. So when, for example, the government of Kenya talks about a shortage of 200,000 units a year, it’s not clear whether they’re talking about housing in the urban areas only or housing in the urban areas and the rural areas.

The reason is that there’s a particular standard of housing that they go by in which case you will find houses that are quite acceptable to the population, but in rural areas they may not fit the definition of a good house for the Ministry of Housing standards. Now for us, we focus specifically on urban areas. And then comes two points: One of which is new build, to follow the growth of the population and urbanization, where you’re building new buildings in new areas, perhaps, or in fields within the urban areas.

“The total number of student beds in the public universities is something less than 5,000. The total number of students that they have is north of 100,000.”

Then there’s a second, which is replacing or improving dilapidated buildings. Just post-independence, many of the governments invested quite a lot in providing housing as a benefit to employees of governments and other companies in the urban areas. But for about 30 or 40 years now, there’s been very limited investment in that, which means that you end up with formal settlements as a consequence. And with young people giving up agriculture to go and pursue the dream that they see of wealth in the urban areas, they end up having to settle in what we now call slums or other very poorly designed buildings, without services around them, without common areas.

In the end, you end up with poor health, poor sanitation and a shortage of electricity and other infrastructure that is required for proper living for the human standards that we have.

Knowledge@Wharton: So the goal in the end is to try to eliminate some of those slum areas, or as many as you can, and build up the supply of affordable housing for middle-income families in that area of the world.

Ong’ong’a: Well, I wouldn’t say that our goal is to eliminate slums or informal settlements, because we don’t. We are a private sector solution. And it’s really the government’s job to deal more deeply with the informal settlements or the slums.

What we are doing is we are saying: Let’s increase the supply of housing to someone who has the means either to rent or to buy, but who currently has to live in either a congested setup, because there isn’t sufficient supply, or a substandard setup, or they are forced to live very far away from work and therefore have a long commute.

Or they might live in a place where the water may only come once a month because they’re relying on unreliable publicly supplied water. Or they don’t have a playground for the kids, so the kids have to play in the parking lot, which puts them in danger….

Knowledge@Wharton: Part of this is also really addressing the need for housing for young adults…. Especially as they’re getting out and getting into the workforce and developing a family — correct?

Ong’ong’a: Actually, the problem starts much earlier. You may know that, generally speaking, Africa is a very youthful continent. What may not be clear to most people is that “youthful” here means something north of 65% of our population is below the age of 30.

Knowledge@Wharton High School

The problem when it comes to housing starts the minute you leave high school because university is the beginning of this program. The universities that we have — public and private — they’re co-business education. Normally, you would expect to have infrastructure supporting that education, part of which includes school rooms, part of which includes the residences for students. That is completely undersupplied.

I will give you a very practical example. Our former President Mwai Kibaki, who is now retired, came up with the free primary school initiative, which the whole world applauded, something like 10 years ago. We are now seeing that first crop graduate from high school. And you know, a million new students appeared in primary school. Let’s say half of them managed to get into high school. Now 150,000 of them are going to university this year or next year. The total number of student beds in the public universities is something less than 5,000. The total number of students that they have is north of 100,000. So from a very early age, you are forced to live in a shack in order to pursue your education.

“The total number of student beds in the public universities is something less than 5,000. The total number of students that they have is north of 100,000.”

The academic institutions don’t have the capital — and neither does the government, really — to put towards the housing. Now, when you graduate, you have the same problem. Even in our fund, initially what we were doing is bringing to the market houses that are targeting families. We’re very limited in terms of studios or one-bedroom apartments. But very quickly, we realized when we came up against the affordability question that we do have to deal with this issue — because not everyone who has a desire for good, quality housing near where they work has a family.

“What ends up happening … for an investor, is that they look at the yield from the property investment. And it tends to be far below the risk-free yield.”

A two-bedroom, two-bathroom house might be ideal for family, but not so much for young people. Furthermore, in the African context — something we’re finding very strange is that in the U.S., you have roommates. It’s a culture that hasn’t yet picked up…. Eventually it will, but currently the question of roommates doesn’t really exist.

Knowledge@Wharton: So it’s people just living alone for the most part?

Ong’ong’a: Yes, or living with family members. Which means you have a lot more congestion. This is specific to those who are not refugees. In the refugee situation, it’s a totally different story….

But here in the U.S., young adults graduating from university will go and say, “Can I room with someone in New York City?” for example. We don’t really have that. The idea of living with strangers hasn’t really sunk in yet.

The universities foresaw this, so they built housing sufficient for the number of students they imagined they would have. However, the growth in the number of students has far outstripped the supply of housing on campus. And the private sector hasn’t been able to catch up for a variety of reasons in supplying good, quality housing.

By the way, where the private sector is currently providing student housing, it ends up being substandard, even for students. You end up with a room that you can barely fit a bed in, and you are paying about 15,000 shillings, which is about $150 a month for that space where you just have a bed and shared bathroom, which is quite expensive….

But in terms of the quality and what you get for it, it’s quite substandard. Now, I can’t really blame the universities, partly because you have government policies of increasing access to education, without the commensurate allocation budget-wise for the physical infrastructure.

The government is quite happy to build some classrooms, which they don’t often do, but they are happy to do that. But the question of student housing doesn’t appear to be a priority. Normally, you would expect that they would first start there; they would house both the faculty members and then the students, and then find a way to increase the academic rooms. But when we discuss students, please also remember that faculty members are also forgotten, and tertiary staff members. They have the same housing problem. Because now, what we have is a distribution of the educational institutions outside of the main urban areas. And they have the same issue.

Knowledge@Wharton: What are the short-term and long-term ways to fix that problem? I mean, obviously, part of it has to involve private sector in companies like yours that can find ways to be able to build out some of this housing, correct?

Ong’ong’a: Correct. Some governments have tried public-private partnerships with some limited measure of success, partly because the other angle to this issue regards the realities of the capital markets. And what I mean by that is the governments in my region pay a fairly high interest rate on their debts…. Which means that for taking a risk, you can get 15% or 20% interest on a bond that you invest in.

Now, when you come to property developments, even those that have public-private partnerships, you don’t get any guarantees. You’re taking open market risk. You’re not certain about the university student paying on time; you may have to rely on the investor to collect rents, which may be a very large component of the cost of attending a university compared to the cost of tuition. What ends up happening, though, for an investor, is that they look at the yield from the property investment. And it tends to be far below the risk-free yield.

Therefore, you have a problem because it doesn’t make economic sense. You’re losing money every year. In Kenya, for example — and this is also the case in Uganda, and it’s a lot better in Tanzania and Zambia and Mozambique — the yield on residential property is somewhere between 5% and 6%, and the risk-free rate is north of 11% to 12% in each of these countries.

So the cost of you borrowing from the commercial bankers is north of 18% in pretty much all of these countries except Kenya, where there are interest-rate controls. What that effectively means to a developer is that you lose money, not just in student housing, but across the board when you make these developments, if you are going for rental. Which is why initially, we focused on where we build to sell these units.

Knowledge@Wharton: How big of a piece of the housing market is rental housing in Ghana and Kenya in that part of the world?

Ong’ong’a: You cannot solve the housing problem if you don’t increase the rental stock, period. And the reason for that — by way of illustration — is that generally speaking, we are observing that the cost of rent is about a third to a quarter of the cost of a mortgage for similarly situated, similarly sized housing opportunities. And with incomes, if you talk about GDP per capita, ranging from $800 to $1,200 — that’s an annual number — you realize fairly quickly that if the world’s standard is that only 30% to 50% of your income should go to housing, many people cannot afford a mortgage.

That means that the solution has got to be that you increase a higher supply of good quality, well-situated rental products. Our existential problem, obviously, as investors is that the returns on the rental side may be quite low, and that’s because of the capital market situation. But there are solutions, which we are here to learn, actually — to investigate and understand. How is it done in the U.S.?

Knowledge@Wharton: Do the governments realize the level of the issue? As you said, they are willing to contribute up to a certain point. But at some point, they almost have to take that next step, understanding that in order to be able to grow the economy and have successful college graduates who aren’t living in shacks while they are going to school, they have to do some other things as well.

Ong’ong’a: Yes, the governments realize it. This month, the Republic of Kenya created an incentive for people who are building more than 400 units per year, where their corporate tax rate halves from 30% to 15%. Some governments are realizing and putting in place incentives. However, very few people can do this.

“Part of the reason why we have corruption as an issue is that police housing is so substandard — families have to share a room, and police have to supplement their incomes in order to make ends meet.”

But intellectually, all these governments understand, because they set up Shelter Afrique, which is a pan-African specialty lender that’s supposed to be supporting the housing sector, and Shelter Afrique is also doing its best to increase the supply of housing. But the challenge, of course, is that that’s on the supply side. There’s also the demand side, and the incomes are what they are. When we look at the end result in the market, it’s that we are very aspirational, so very many people are taking the solution into their own hands, so that families now invest in plots of land. Sometimes far away from where they work, because they want to be able to build their own house.

They do this one building block at a time or one room at a time, because that’s what the incomes can support. We’re not saying that those houses are inferior. They tend to cost a lot more than buying a built house. But from the perspective of what income I have now, that seems to be the most affordable way to go about it. Governments, generally speaking, in the region, have had a big problem, because for example, police housing in our region is a big issue.

As populations have grown, you’ve had more and more police people, but the governments don’t have the money to house the policemen properly. So part of the reason why we have corruption as an issue is that police housing is so substandard — families have to share a room, and police have to supplement their incomes in order to make ends meet.

It’s a big challenge; our continent has very many problems. We, in the private sector, are saying, “We will try our best; we will continue to lobby with our governments to get incentives, such as what Kenya has given developers now.” But it’s a long road

In the meantime, we will try and see. Are there learnings we can take, for example, from the U.S., that can make it easier for us to continue to develop, particularly the rental side, and to show other people how it can be done better? Because part of the other problem is that my business is on the building side. But then there’s the infrastructure question, which contributes quite a lot to the cost of housing. When we open up new areas, often times, the government comes 15 years later with the roads, with the electricity, with the water. Meanwhile, the first people to go to these areas, they have to pay the full cost and the risk of insecurity of having an insecure supply of water and electricity, as well.

Some governments are better at this than others. Rwanda, in particular, deserves credit. It’s extremely efficient if you want to get approvals and they try to open up these roads quite quickly. Other countries have prioritized other areas, so you might end up having a development that sits there for quite a long time before it gets basic services.

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One Comment So Far

Joel Mwaura

Great and comprehensive article. Very insightful into the housing issue in Kenya. Absolutely essential for anyone looking to solve the problem to have such a refined insight, especially how the financial numbers tie in!